The Federal Reserve System raised its benchmark federal funds rate to a range between 1 and 1.25 percent Wednesday.
This is the second increase so far this year — already more than the one hike made in 2016. But it’s unlikely to be the last hike of 2017.
A statement issued after Wednesday’s vote noted that “economic activity has been rising moderately so far this year.” It went on to cite “moderated” but “solid” job gains and increased household spending in recent months, as well as declining unemployment and inflation.
The Federal Reserve — commonly known simply as “the Fed” — is responsible for setting monetary policy for the country. When it hikes the federal funds rate, the move is bound to impact your finances.
Whether that impact is for better or worse, however, depends on your debts and savings. The Fed’s latest hike will have many impacts, including:
1. Credit card debt will sting a little more
Most credit card interest rates are variable, meaning they go up and down along with interest-rate trends as a whole. So most cardholders will be affected by the rate hike unless they pay off bills in full every month, thus avoiding interest charges.
2. Loans will cost you more
Interest rates for other types of loans, such as auto loans and personal loans, might also rise. This can make borrowing more expensive, and adds to the overall cost of the goods you buy with borrowed funds.
3. Your mortgage payment might rise
If you already have a fixed-rate mortgage, you will not be affected. But if you have an adjustable-rate mortgage (ARM), expect rates to rise. An ARM is tied to an index, such as the London Interbank Offered Rate, or Libor. When the Fed raises the federal funds rate, such indexes tend to rise too.
As an index climbs, so will the rate on your ARM — and the size of your monthly mortgage payment — the next time your loan is scheduled to “adjust.”
4. Savings and money market accounts might pay more
It’s good practice to periodically compare interest rates on savings vehicles, as we detailed earlier this week in “This Bank Now Pays Even More Interest on Your Savings.” Interest-bearing savings vehicles include money market accounts and savings accounts.
5. CD rates should finally be on the rise — eventually
Certificates of deposit (CD) are also interest-bearing accounts, and rates on them should start rising — either now or sometime in the future — as the Fed raises rates.
The bottom line
If federal funds rate hikes continue, borrowing will become more expensive. So pay down any debts as quickly as possible and consider finding a new credit card or refinancing loans or mortgages to secure a better interest rate.
On a more positive note, you also stand to earn more interest on your savings if you shop around. You can search for a higher-paying savings account in the Money Talks News Solutions Center.
How do you feel about today’s rate hike? Sound off below or over on our Facebook page.